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Smile, because Pfizer just increased the annual payout of its shareholders by 7%. Here are three reasons why Pfizer can safely boost its payout.

Compared to its peers, pharmaceutical kingpin Pfizer(NYSE:PFE) has had a pretty good year. Shares of the drugmaker are up nearly 5% year to date, and that doesn't include the 3.5% dividend yield that shareholders are currently privy to.

But the year got even better on Dec. 14, when Pfizer announced a first-quarter 2016 dividend payout of $0.30, a 7% increase over the $0.28 per quarter it's been paying in each of the past four quarters. This marks the seventh dividend increase for Pfizer since 2009, the year where it was forced to slash its dividend by 50% in order to fund its buyout of Wyeth. The new yield is 3.75%.

Within the dividend declaration press release, CEO Ian Read said:

The dividend increase is a testament to our continued commitment to enhancing shareholder value and our confidence in the business.

While its dividend increase does demonstrate the willingness of Pfizer's management to do right by its shareholders, there are three far better reasons why it boosted its payout for 2016.

Ibrance sales are kicking butt Pfizer's biggest issue this decade has been the loss of patent exclusivity on key drugs, with none being more important than cholesterol-fighter Lipitor, which at one time generated roughly $13 billion per year in sales. Patent losses and the introduction of competition drugs in a handful of therapeutic indications pushed Pfizer's full-year sales down by roughly $20 billion since 2010. Pfizer needed a spark to reignite its hopes for growth, and it appears to be getting just that from breast cancer drug Ibrance.

Image source: Pfizer.

Ibrance is a pill administered to metastatic breast cancer patients who are HER2-negative and estrogen receptor-positive. In clinical studies that led to its approval, Ibrance practically doubled progression-free survival for patients and added slightly more than four months of median survival time compared to the placebo. With around a half-dozen other trials involving Ibrance underway or planned, there are high hopes in Pfizer's camp that Ibrance's label will be expanded in the coming years.

Ibrance's early launch has been impressive. Despite hitting pharmacy shelves in February, Pfizer announced that in the third quarter, just its second full quarter of sales, it tallied $230 million in sales. It's quite possible that Ibrance could be on pace for more than $1 billion in sales in 2016. Having a blockbuster in its back pocket is a big reason why Pfizer can afford to pump up its dividend.

The Allergan deal should save a lot of moneyIn November, Pfizer announced a transaction that dwarfed the Wyeth deal in total market value. Pfizer and Allergan(NYSE:AGN)announced a merger whereby Allergan shareholders would be paid 11.3 shares of Pfizer's common stock for each share of Allergan they held. The deal valued Allergan at nearly $364 per share the day it was announced.

Image source: Pixabay.

Why combine? The deal allows Pfizer and Allergan to bring in excess of 100 mid-to-late-stage clinical products under one roof, create a powerhouse capable of more than $25 billion in cash flow by 2018, and deliver high-teen-percentage EPS growth by the end of the decade.

Most importantly, though, the Allergan deal is structured such that Allergan is doing the purchasing and Pfizer will be able to redomicile its headquarters to Ireland, where Allergan is based. Moving its headquarters overseas will reduce Pfizer's top marginal corporate tax rate from roughly 25% in the U.S. to between 17% and 18% in Ireland, which Pfizer claims will save the company $1.2 billion in taxes in 2017. Overall cost synergies from the deal could top $2 billion. The money being saved from this deal makes raising its dividend an easy decision for Pfizer.

Growth from deal-making won't happen overnightThe third point is that the growth Pfizer expects to see from its Allergan deal, as well as from its acquisition of Hospira and the development of cancer immunotherapy avelumab with Merck KGaA, isn't going to happen overnight. In fact, Pfizer notes the deal with Allergan isn't expected to be accretive to Pfizer's bottom line until 2018.

Image source: Pixabay.

In order to keep investors happy while waiting for growth from acquisitions to kick in, it's decided to boost its dividend. Keeping its payout far above the market average also has a tendency to attract long-term income investors, which can minimize volatility and provide some sort of downside buffer if the stock market or U.S. economy weakens. In layman's terms, it's Pfizer's admission that growth may not be up to investors' standards for another year or two, so it's providing a little something extra to hold its shareholders over until it does.

Should you be buying Pfizer following its dividend hike? That depends on your investment goals and time horizon. Pfizer offers its shareholders a solid dividend and a long-tail growth opportunity. However, anyone investing today is probably going to be waiting five to 10 years before they see substantial returns. However, its 3.7% yield may help make up for its modest growth and share price appreciation.

If you're looking for a lower-risk stock and have the patience to stick with it over the long run, you could probably do a whole lot worse than Pfizer.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong